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Czech Yield Falls to Record Low After S&P Upgrade; Koruna Gains

Czech five-year yields tumbled to a record low after a two-notch rating upgrade by Standard & Poor’s boosted demand for the European Union member’s government bonds. The koruna strengthened against the euro and stocks rallied.

The five-year yield fell to 2.34 percent today, the lowest closing level since Bloomberg started tracking Czech government bond indexes in 1997. The PX stock index rose 1.6 percent, the most in a week, led by a 4.1 percent jump for Komercni Banka AS.

S&P lifted the country’s long-term foreign-currency debt to AA- from A, it said in a statement today. That is its fourth-highest grade and on par with euro-region Estonia. The move was prompted by a change in S&P’s sovereign-rating criteria that highlighted the government’s low indebtedness and the “prudently managed and balanced economy,” according to the statement.

“An upgrade for the Czech Republic has been in the pipeline for some time and the government’s prudent fiscal policies and commitment to fiscal consolidation have warranted the improved rating,” Dina Ahmad, a strategist at BNP Paribas SA in London, wrote in an e-mailed report today. “The ratings upgrade will provide a clear boost to bonds.”

Czech public debt at 41 percent of gross domestic product compares with 55 percent in neighboring Poland, more than 80 percent for AAA-rated Germany and France and 120 percent for Italy, European Commission estimates for this year show.

The cost of insuring Czech debt using credit-default swaps was little changed today at 117, according to data provider CMA. That’s less than 163 for France and 125 for Austria, both rated AAA at S&P.

The new rating criteria put more weight on the “political and economic profile” of central governments, S&P said today.

‘Prudently Managed’

“Our ratings on the Czech Republic thus reflect its prudently managed and balanced economy,” S&P said. “The economy is characterized by low levels of foreign borrowing, a deposit-funded banking sector with minimal lending in foreign currency, and a largely independent central bank that has kept both consumer-price inflation and interest rates at low levels.”

Parliament’s budget committee today approved a pension overhaul plan, sending the legislation to the final reading at the lower house. The changes are to boost private retirement savings and curb future budget deficits.

The administration has pledged to cut its fiscal shortfall to less than the EU limit of 3 percent of gross domestic product by 2013 from 4.7 percent last year and to have a balanced budget from 2016. Prime Minister Petr Necas has said the overhaul of pensions and healthcare are the main goals for his Cabinet.

Social Welfare Changes

“The upgrade also incorporates our expectation that the proposed reform of the social welfare system, which aims to reduce spending related to ageing, will be approved and implemented,” S&P said today.

There are no reasons to raise the benchmark interest rate from the record-low 0.75 percent as the global economic slowdown adds to anti-inflationary risks for the Czech economy, central bank Vice-Governor Mojmir Hampl said today. Inflation slowed for a second month in July, with the annual rate down to 1.7 percent from 1.8 percent a month earlier, a report on Aug. 9 showed.

The koruna, the best performer so far this year among more than 20 emerging-market currencies tracked by Bloomberg, gained 0.5 percent to 24.327 per euro at 6:35 p.m. in Prague. It is poised to appreciate to 24.10 per euro after the S&P move, according to BNP.

Raiffeisenbank AS lifted its short-term recommendation for Czech bonds to “hold” from “sell,” Michal Brozka, a fixed-income analyst based in Prague, wrote in an e-mailed report. The increase by two notches “is a surprise,” he said.

“This means that the Czech state and consequently other Czech entities should have an opportunity to finance themselves under better conditions,” Brozka said.

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